Washington: US producer prices increased more than expected in February as the cost of services such as hotel accommodation pushed higher and the year-on-year gain was the largest in nearly five years, pointing to steadily rising inflation pressures.
Firming inflation, together with a tightening labor market, which is expected to generate strong wage growth, could allow the Federal Reserve to raise interest rates on Wednesday.
"Steadily rising inflation gives the Fed more reason to lift rates tomorrow," said Jennifer Lee, a senior economist at BMO Capital Markets in Toronto.
The Labor Department said on Tuesday that its producer price index for final demand increased 0.3 per cent last month after rising 0.6 per cent in January. Economists polled by Reuters had forecast a 0.1 per cent uptick.
In the 12 months through February, the PPI jumped 2.2 per cent, the biggest advance since March 2012 and ahead of the 2.0 per cent gain forecast in the Reuters poll. It followed a 1.6 percent increase in January.
The fairly strong producer inflation readings came as Fed officials gathered on Tuesday for a two-day policy meeting. The dollar was trading higher against a basket of currencies, while US stocks were lower ahead of the Fed meeting. Prices for US Treasuries rose.
Producer prices are rising as the prior weak readings, induced by cheap oil, drop out of the calculation. Crude oil prices have risen above $50 per barrel.
Also boosting price pressures are the dollar's 1.5 per cent drop against the currencies of the United States' main trading partners since January and overall commodity price gains in tandem with a firming global economy.
Core PPI rising
A key gauge of underlying producer price pressures that excludes food, energy and trade services increased 0.3 per cent in February, the biggest gain since April 2016. The so-called core PPI rose 0.2 per cent in January.
Core PPI increased 1.8 per cent in the 12 months through February after advancing 1.6 per cent in January.
The Fed has a 2 per cent inflation target and tracks a measure that is currently at 1.7 per cent. The US central bank is expected to raise its overnight benchmark interest rate by 25 basis points to a range of 0.75 per cent and 1.00 per cent on Wednesday. It increased borrowing costs last December and has projected three rate hikes in 2017.
In February, prices for final demand services increased 0.4 per cent, accounting for more than 80 per cent of the rise in the PPI. That was the biggest increase since June 2016 and followed a 0.3 per cent gain in January.
The increase in the cost of services was driven by a 4.3 per cent surge in hotel accommodation. There were also increases in the prices of chemicals, legal services, wholesale apparel and architectural and engineering services.
Healthcare costs rose 0.2 per cent after a similar gain in January. Inpatient healthcare services increased 0.3 per cent last month, while the cost of outpatient care rose 0.2 per cent.
Those costs feed into the Fed's preferred inflation measure, the core personal consumption expenditures index. As a result of last month's increase, Morgan Stanley economist Ted Wieseman said he expected a 0.16 per cent gain in PCE medical services in February after an unchanged reading in January.
Medical services accounts for 19 per cent of core PCE.
The cost of energy products increased 0.6 per cent last month, slowing from January's 4.7 per cent surge. Wholesale food prices increased 0.3 per cent after being unchanged in January.
"Inflation pressures are continuing to build in the US economy," said Rob Martin, an economist at Barclays in New York. "With labour markets continuing to tighten, and the dollar and commodity prices broadly stable, we see inflation firming this year and next."